Inflation fears after consumers pursue January sales spree

Consumers continued their Christmas shopping spree into the new year, pushing high street sales up at their fastest pace in two years, the CBI said yesterday.

Its keenly awaited distributive trades survey, carried out in the first half of January, showed 51% of retailers saw stronger sales this month compared with a year ago, while 21% said they were lower. The balance of 30% was markedly up from the previous month's result of 25% and the highest monthly reading since December 2004. The figure was also the strongest January balance since 2004 and far exceeded retailers' modest expectations of a 4% balance.

"The pre-Christmas growth in year-on-year sales volumes has carried convincingly through into the January sales," said John Longworth, chairman of the CBI's distributive trades survey. "It was a much better story than retailers had expected. December's strong showing was driven by some very heavy discounting and it is likely January will be the same."

The CBI survey also showed retailers were confident sales would continue to be robust in February. More retailers were optimistic than cautious about future sales, a balance of 22%, the strongest score since September 2004.

"Evidence that consumers are spending freely at the moment and retailers' increased confidence about future prospects is likely to heighten the Bank of England's concerns that retailers will increasingly try to push through significant price hikes," said Howard Archer, economist at researchers Global Insight. " The buoyant CBI survey increases the pressure on the Bank to raise interest rates further."

But with the Bank surprising financial markets with a third quarter-point rise earlier this month, many analysts said the higher rates would eventually cool consumer spending.

Separately, the quarterly economic forecast by the National Institute of Economic and Social Research also said interest rates would move higher at least once more this year to keep inflation within its target range. Their estimates showed growth to be above trend for this year at 2.8% due to solid domestic demand and high household consumption. This was partly due to a robust housing market boosting household wealth by approximately 9% last year, it said.

"We expect one more [interest rate] rise in the second quarter and a possible third one in October which would take rates up to 5.75%," said Ray Barrell, research fellow at the institute. "We were calling for the Bank to raise rates by a half point in November since it was clear the inflationary pressures were stronger than thought. This would have had much more of an effect in shocking the market and reduced the need for more and larger rises later."

However, the institute said the 3% inflation in the economy was not particularly significant. "Inflation is under control in the UK, we expect it to fall back close to target by the second half of this year and return to target at the end of 2009."